Spousal Labor Supply Underestimation Gap
RCTReview
Evaluating wealth effects on labor supply exclusively at the individual lottery winner level misses the concurrent work adjustments made by the winner's spouse. Aggregating labor responses across both partners reveals the true total household reduction in labor supply.
Picture this
Imagine measuring how much a family reduces electricity use when one partner buys a generator, but ignoring the fact that the other partner also turns off several household appliances. Measuring only the buyer's actions misses a substantial portion of the total household energy savings.
What the evidence says
Individual married winners reduce pre-tax labor earnings by 0.965 SEK per 100 SEK won, while their spouses reduce earnings by 0.408 SEK per 100 SEK won; the total household response is -1.306 SEK per 100 SEK won, indicating that individual-level analysis understates true total labor supply reductions by 23%.
- Who was studied
- N = 244,826 full sample observations (142,102 married winner-spouse pairs in Sweden).
- How
- Econometric panel analysis comparing 5-year post-win pre-tax earnings reductions of individual winners against combined household earnings reductions using randomized lottery cells.
What to do
Multiply individual-level income effect estimates by a factor of 1.23 to capture total household labor supply reductions when evaluating unearned wealth transfers.
From the source
"Including the response of non-winning spouses increases the labor supply response from -1.066 to -1.306. Focusing only on winners thus leads us to an underestimation of the labor supply response by 23 percent."
f8929526-9215-4a78-95ce-8377460687e7-The Effect of Wealth on Individual and Household Labor Supply- Evidence from Swedish Lotteries..pdf